An off-balance-sheet forward position is used to hedge the FI’s on-balance-sheet risk
exposure.
Answer:
In the U.S., cash reserves necessary to meet deposit reserve requirements typically
include vault cash and cash deposits at the Federal Reserve Bank.
Answer:
Because of penalties imposed for early withdrawal, a CD depositor is unlikely to
withdrawal the CD funds from the bank before maturity.
Answer:
The movement of an off-balance-sheet asset or liability to an on-balance-sheet item is
dependent on the occurrence of a contingent event.
Answer:
Regulation F, a part of the FDIC Improvement Act of 1991, requires financial
institutions to develop internal procedures to limit settlement exposures to
correspondent banks.
Answer:
Market makers in an NYSE stock are obligated to buy shares from sellers even when
the market for the stock is declining.
Answer:
When-issued trading involves the commitment to buy and sell securities before they are
issued.
Answer:
Some corporate customers that rely on bank loans may see the sale of one of its loan by
the bank as an adverse event in the customer-bank relationship.
Answer:
The amount of regulations that have been proposed because of the increased use of
risk-reducing OBS derivatives is increasing.
Answer:
The life of a Structured Investment Vehicle (SIV) is not tied to any particular asset class
that it is responsible for securitizing.
Answer:
Discriminant models often ignore hard-to-quantify factors in the credit decision.
Answer:
All banks with assets greater than $10 billion are considered money center banks.
Answer:
It is advantageous for the residential mortgage holder to refinance because market
interest rates on new mortgages are less than interest rates on existing mortgages.
Answer:
The asset transformation function of an FI is to issue primary financial claims to
corporations while purchasing primary claims issued by households and other
investors.
Answer:
If a commercial bank engages in OBS activities, there are no additional capital
requirements imposed by regulators.
Answer:
The improved financial health of the FDIC during the 1990s resulted in a considerable
reduction in deposit insurance premiums.
Answer:
U.S. banking offices abroad normally are permitted by the Federal Reserve System to
engage in activities that are allowed in the foreign country even when such activities are
not permitted in the U.S.
Answer:
The employment of deposit brokers allows individual depositors to receive deposit
insurance coverage on total asset balances well in excess of $250,000 at any given
bank.
Answer:
Critics of the current FDIC insurance programs often argue that only uninsured
depositors have any incentive to discipline riskier banks.
Answer:
To a U.S. trader of foreign currencies, a direct quote indicates U.S. dollars received for
each one unit of the foreign currency.
Answer:
The evaluation of credit risk of off-balance-sheet (OBS) assets under Basel III requires
that the notional amount of OBS items be converted to credit equivalent amounts of
on-balance-sheet items.
Answer:
Open-end mutual funds are the major type of mutual funds.
Answer:
The FX markets of the world have become one of the largest of all financial markets.
Answer:
The FIRREA prohibited all insured financial institutions from accepting brokered
deposits or paying interest rates that are significantly higher than existing market rates.
Answer:
Since 2002, the amount of assets invested in load funds have exceeded those invested in
no-load funds.
Answer:
In 1998, the SEC required that portions of mutual fund prospectuses must be written in
easily understood “plain” English.
Answer:
An FI’s most liquid asset is cash.
Answer:
Because of the large amount of equity on a typical commercial bank balance sheet,
credit risk is not a significant risk to bank managers.
Answer:
The policy reserves on the liability side of the balance sheet of a life insurance company
are estimated based on actuarial assumptions of expected future liability commitments
on currently existing contracts.
Answer:
The risk-based capital ratio does account for loans made to companies with different
credit ratings.
Answer:
A major role of the captive finance company is to provide financing for the purchase of
products manufactured or sold by the parent company.
Answer:
If an FI enters into a loan commitment, it is essentially entering into a forward contract.
Answer:
The Designated Reserve Ratio is a rule that stipulates that highly-rated DIs would not
pay deposit insurance premiums if this ratio was above 25 percent.
Answer:
In most countries, assets used to satisfy the liquid assets ratio may include liquid
government securities.
Answer:
Hedging a specific on-balance-sheet cash position usually will only require more T-bill
futures contracts than hedging the same cash position with T-bond futures contracts
because the T-bond contract size is only 10 percent as large as large as the T-bill
contract.
Answer:
Banks whose loan portfolio composition deviates from the national benchmark should
immediately implement policies to move toward benchmark alignment.
Answer:
The following three FIs dominate a local market and their total assets are given below.
What are the market shares of banks A, B and C,
respectively? A. 25 percent, 45 percent, and 30 percent.
B. 30 percent, 40 percent, and 30 percent.
C. 40 percent, 30 percent, and 30 percent.
D. 25 percent, 30 percent, and 45 percent.
E. 25 percent, 35 percent, and 40 percent.
Answer:
What is the average return (explicit and implicit) earned by her if the bank pays interest
only on the amounts in excess of the required minimum of $500? A. 9.01%.
B. 7.56%.
C. 6.93%.
D. 5.97%.
E. 8.23%.
Answer:
Participation in the activities relating to the underwriting and distribution of new issues
of debt and equity by a securities firm involves the function of A. investing.
B. merger and acquisitions.
C. market making.
D. investment banking.
E. trading.
Answer:
Giving the purchaser the right to buy the underlying security at a prespecified price is a
A. put option.
B. call option.
C. naked option.
D. futures option.
E. credit spread call option.
Answer:
What is the special feature of an off-market swap arrangement? A. It involves special
nonstandard considerations that must be negotiated between the parties.
B. The swap is used to hedge against exchange rate risk from mismatched currencies
on assets and liabilities.
C. It involves additional financing costs resulting from the fixed-fixed currency swap.
D. It involves an obligation to pay interest at a fixed or floating rate for payments
representing the total return on a specified amount.
E. FI receives the par value of the loan on default in return for paying a periodic swap
fee.
Answer:
What is the Herfindahl-Hirschman Index (HHI) for the local market? A. 1,000.
B. 3,450.
C. 3,550.
D. 3,400.
E. 60.
Answer:
From January 2008 to December 2009, there were a total of ____ FDIC insured bank
failures, which cost the FDIC approximately ____ billion to resolve. A. 26; $17
B. 140; $39
C. 166; $56
D. 211; $69
E. 234; $72
Answer:
As a result of the Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA), the deposit insurance fund for the savings and loan industry has been
combined with the deposit insurance fund for the commercial banking industry.
Answer:
How would you characterize the FI’s risk exposure to fluctuations in the Euro to dollar
exchange rate? A. The FI is net short in the Euro and therefore faces the risk that the
Euro will rise in value against the U.S. dollar.
B. The FI is net short in the Euro and therefore faces the risk that the Euro will fall in
value against the U.S. dollar.
C. The FI is net long in the Euro and therefore faces the risk that the Euro will fall in
value against the U.S. dollar.
D. The FI is net long in the Euro and therefore faces the risk that the Euro will rise in
value against the U.S. dollar.
E. The FI has a balanced position in the Euro.
Answer:
What is the average return earned (explicit and implicit) by her over the year? A.
6.33%.
B. 9.67%.
C. 8.39%.
D. 9.53%.
E. 7.01%.
Answer:
The argument that mergers are valuable because they create revenue synergies is based
on A. the opportunity to expand into less than fully competitive markets.
B. the diversification effects of combining dissimilar asset and liability portfolios.
C. realizable economies of scope.
D. the enhancement of revenues by acquiring a bank in a growing market.
E. Answers A, B, and D only.
Answer:
Which of the following is indicated by high numerical value of the duration of an asset?
A. Low sensitivity of an asset price to interest rate shocks.
B. High interest inelasticity of a bond.
C. High sensitivity of an asset price to interest rate shocks.
D. Lack of sensitivity of an asset price to interest rate shocks.
E. Smaller capital loss for a given change in interest rates.
Answer:
An investment bank may take a big loss when underwriting an issue on a firm
commitment basis because A. it may overestimate the demand for the shares by the
market.
B. it may underestimate the demand for the shares by the market.
C. interest rates may rise during the offering period.
D. security prices in general may increase during this period.
E. Answers A and D only.
Answer:
Which of the following is NOT a provision of Sarbanes-Oxley Act? A. Created an
independent auditing oversight board.
B. Increased penalties for corporate wrongdoers.
C. Forced faster and more extensive financial disclosure.
D. Created avenues of recourse for aggrieved shareholders.
E. Required investment analysts’ compensation to be a function of the quality and
accuracy of research they produce.
Answer:
If two countries are identical in all respects except that country A’s debt service ratio is
1.5, country B’s debt service ratio is 1.25, country A’s import ratio is 0.75, and country
B’s import ratio is 0.90, which country poses the least sovereign country risk?A.
Country A, because the higher debt service ratio’s negative impact on the country’s risk
exposure outweighs the impact of the lower import ratio effect.
B. Country B, because the higher debt service ratio’s negative impact on the country’s
risk exposure outweighs the impact of the lower import ratio effect.
C. Country A, because the higher debt service ratio’s positive impact on the country’s
risk exposure outweighs the impact of the lower import ratio effect.
D. Country B, because the lower debt service ratio’s impact outweighs the higher
import ratio’s impact on the country risk exposure.
E. They both have the same sovereign country risk exposure.
Answer:
A total return credit swapA. can allow an FI to maintain long-term customer lending
relationships without bearing the full credit risk exposure from these relationships.
B. involves exchanging an obligation to pay interest at a specified rate for payments
representing the total return on a loan of a specified amount.
C. can be important because credit risk is more likely to cause an FI to fail than either
interest rate risk or FX risk.
D. All of the above.
E. Answers A and C only.
Answer:
Which of the following is NOT a reason for the credit risk on a swap to be less than the
credit risk on a loan? A. Swap contracts often extend beyond the maturity of normal
loan contracts.
B. Swap payments can be netted more easily than on a loan contract.
C. Interest rate swaps involve interest, but not principal.
D. Differences in credit quality between parties can be equalized through the use of
standby letters of credit.
E. All of the above are reasons for swaps to have less credit risk.
Answer:
A corporation is planning to issue $10 million worth of 180-day commercial paper. In
order to reduce the interest rates by 25 basis points (per year), it plans to back this issue
with a standby letter of credit or a loan commitment. The standby letter of credit is
available for 20 basis points (per year) to be paid up-front. The loan commitment for
$10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis
points back-end fee.
What are the savings to the corporation if it obtains a standby letter of credit to back its
$10 million issue of commercial paper? A. $1,250.
B. $2,500.
C. $3,750.
D. $5,000.
E. $6,250.
Answer:
What is the average return (both explicit and implicit) earned by the account holder if
the bank pays interest on only the amounts in excess of the required minimum of $200?
A. 2.01 percent.
B. 2.65 percent.
C. 3.78 percent.
D. 5.35 percent.
E. 6.13 percent.
Answer:
The decrease in European FX volatility during the last decade has occurred because of
A. the stabilizing force of the euro.
B. reduction in inflation rates in European countries.
C. the reduced volatility in many emerging-market countries.
D. the greater volatilities of Asian currencies.
E. Answers A and B only.
Answer:
Which of the following liability products does NOT have withdrawal risk? A.
Wholesale CDs.
B. Money market deposit accounts.
C. Retail CDs.
D. NOW accounts.
E. All of the above have withdrawal risk.
Answer:
An investor sold a $100,000 Treasury bond futures contract at 99-02/32nds yesterday.
Today the Treasury bond futures settlement price is 99-31/32nds. What is the one-day
profit or loss on the Treasury bond futures position?A. A profit of $906.25.
B. A loss of $906.25.
C. A profit of $733.
D. A loss of $733.
E. A loss of $290.
Answer:
With regard to market value risk, rising interest rates A. increase the value of fixed rate
liabilities.
B. increase the value of fixed rate assets.
C. increase the value of variable-rate assets.
D. decrease the value of fixed rate liabilities.
E. decrease the value of variable-rate assets.
Answer:
The maximum reserves that will count toward the next reserve maintenance period,
September 23 to October 6, is A. $44.565 million.
B. $42.406 million.
C. $45.565 million.
D. $40.406 million.
E. $41.406 million.
Answer:
Unanticipated diseconomies of scale or scope are a result of A. interest rate risk.
B. technology risk.
C. credit risk.
D. foreign exchange risk.
E. off-balance-sheet risk.
Answer:
The traditional interbank loan sale market has been shrinking for which of the following
reasons?A. The barriers to nationwide banking have been largely removed through
legislation.
B. Concerns about counterparty risk and moral hazard have increased.
C. The traditional correspondent banking relationships are slowly breaking down.
D. All of the above.
E. Only two of the above.
Answer:
All of the following are associated with contagious runs EXCEPT A. liability holders
not distinguishing between good and bad FIs.
B. liability holders seeking to quickly turn their liabilities into cash or safe securities.
C. a contractionary effect on the supply of credit.
D. negative social welfare effects.
E. an expansionary effect on the regional money supply.
Answer:
A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a
C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and
paying 7 percent annually. You expect to liquidate your position in 1 year upon maturity
of the CD. Spot exchange rates are US $0.78493 per Canadian dollar.
Your position is exposed to: A. interest rate risk only.
B. credit risk only.
C. exchange rate risk only.
D. interest rate and exchange rate risk only.
E. interest rate risk, exchange rate risk, and credit risk.
Answer:
Which of the following is a factor deterring U.S. bank expansions abroad? A. The
dollar as an international medium of exchange.
B. Political risk concerns among savers in emerging markets.
C. Domestic regulatory restrictions.
D. Capital constraints.
E. Technology and communications improvements.
Answer:
What is the portfolio weight of the Euro in this FI’s portfolio of foreign currency? A.
+0.18 percent.
B. -36.62 percent.
C. +75.20 percent.
D. -5.47 percent.
E. +66.70 percent.
Answer:
Guaranteed investment contracts (GICs) offered by a life insurance company A. are
endowment life policies marketed to group insurance policyholders.
B. are short- and medium-term debt instruments sold to fund their pension plan
business.
C. can only be purchased by a group life insurance plan.
D. earn a return based on the consumer price index (CPI).
E. Short- and medium-term investments in venture capital firms.
Answer: